Ship ahoy: NOL to veer towards profit gains amid EU, US stimuli

FY2013 PATMI forecast is pegged at USD102m.

According to Maybank Kim Eng, badly needed EU and US stimulus shores up confidence. Our previous SELL call was premised on a neutral-to-negative demand outlook clouded by Euro-zone uncertainty.

Here's more from Maybank Kim Eng:

While the current EU and US stimulus’ direct benefits will take some time to materialise, what we see most important is the commitment to shoring up confidence in the respective regions’ economies:

1) EU bond-buying program (6 Sep 2012): The EU effectively provided a conditional backstop to sovereign bond yields in the Eurozone. Any country agreeing to the conditions of the EFSF / ESM package, with conditionality imposed and monitored by the IMF, will qualify for unlimited intervention in the secondary market for its 1-3 year bonds by the ECB.

2) US QE3 (13 Sep 2012): The US FOMC announced an openended commitment to QE3, pledging to purchase Mortgagebacked securities (~USD40b monthly) until unemployment declines enough. It also extended its conditional commitment to
keep the Fed funds rate near zero until mid-2015.

Lowered cost of borrowing with unprecedented backing. The ECB has effectively lowered the cost of borrowing across the Euro-periphery and has forestalled the worst danger of a synchronized global recession in 2013. In the US, the new MBS buying program is intended to continue until unemployment declines sufficiently.

Both these measures would provide a badly-needed boost to global confidence, stimulate spending and as a result, improve world trade.

While this news has not gotten the market immediately euphoric, we see these steps paving the way for emergence from the bottom for beta plays such as NOL, from a demand-led perspective. We increase our volume assumptions by 3.4% p.a. for our 2013 and 2014 forecasts and similarly boost our freight forecasts by 3-6% p.a.

This adds incremental revenue of USD580m and USD960m respectively to our 2013 and 2014 forecasts, and most significantly, swing our FY2013 PATMI forecasts from a ~USD30m loss to a USD102m profit. FY2014 PATMI is now up USD167m to USD353m.

NOL’s revenue and profit bases are largely derived from Asia-US and Asia-Europe, with the former contributing a majority of close to 50%. The Asia-US revenue composition has been on a downtrend as NOL’s Asia/Middle-East trade has shown impressive revenue growth from 21% in 1Q2009 to 29% in the most recent 2Q2012.

Between the two trade routes, we expect NOL to benefit from the healthier US economy which has now been given a shot in the arm by the Fed’s QE3. Europe, on the other hand still presents risks and might take a more prolonged recovery trajectory.